Whether it’s to accept a cost price increase or to address a declining Net PPM. Cost Support Agreements (CSAs) have become the preferred choice in the tool belt of Amazon buyers.
But what sounds good on paper can dilute the profitability of 1P vendors quickly. Pricing errors and overstock markdowns get funded with CSAs and leave vendors exposed to significant financial risks in their P&L.
So today, let’s understand the three types of Amazon margin support agreements and their commercial implications:
Let’s get started.
What is a Cost Support Agreement (CSA)?
Cost Support Agreements are the most commonly requested funding type among Vendor Managers. Previously known as Margin Compensation (MCP), Amazon will ask for a CSA to offset a decline in its Net PPM YoY.
Suppliers requesting a cost price increase are often also asked to agree to CSAs equivalent to the price change. That way, Vendor Managers try to protect their Net PPM in case the new prices don’t translate into the market segment.
CSAs can be set up as a straight payment, per unit funding or as a percentage of a vendor’s net sales. They form part of the trade terms of first-party vendors.
What is a Guaranteed Minimum Margin Agreement (GMM)?
Guaranteed Minimum Margin Agreements are similar to CSAs. But instead of a pre-agreed funding level, they guarantee a minimum margin for Amazon. This minimum margin is often oriented on the Vendor Manager’s target Net PPM for your vendor account.
While GMM agreements secure Amazon’s desired Net PPM, they don’t offer the same safety net for 1P vendors. If your Net PPM exceeds the target threshold, no credit value will be awarded to your account.
This is especially risky if the GMM is set up at the ASIN level. Even if the Net PPM exceeds its target at the account level, you will still be asked to compensate Amazon for any ASINs that fall below the set thresholds.
What is a Guaranteed Margin Agreement (GMA)?
Guaranteed Margin Agreements are the most advanced type of funding agreements. They are set up to compensate Amazon whenever an ASIN or account performs below a defined target Net PPM.
However, they will also credit your vendor account if your account or individual ASINs exceed the Net PPM threshold.
For example, your account may accrue a Net PPM credit of $100,000 in January. If Amazon’s Net PPM then falls below the target in February, Amazon will use that budget before charging you a GMA.
Evaluating Cost and Margin Support Agreements with Amazon
Investing in any type of margin funding should be done with caution. CSA, GMA, and GMM agreements can expose your vendor business to significant financial risks.
For example, Amazon may still markdown overstocked products and expect you to foot the bill. In case of algorithm-led pricing errors, the resulting Net PPM dilution will still be automatically invoiced through the guaranteed margin agreement.
So when evaluating the investment, make sure to assess and quantify the potential benefits against the risks. While margin funding agreements often reduce the sales disruption caused by CRAP, they may cost you more than the profit generated by the additional sales.
Best Practices for Managing Cost and Margin Support Requests from Amazon
When confronted with cost or margin support requests, make sure you keep the following four best practices in mind:
1. Review the legal implications
Don’t agree any margin or cost support without consulting your legal counsel. While funding agreements may look innocent on paper, they do carry significant legal implications for your brand.
If you provide different levels of support to Amazon compared to other retailers, especially without clear, objective criteria, this could raise competition law issues in some jurisdictions (e.g., claims of unfair advantage or discrimination).
In addition, EU vendors must ensure that any funding does not prevent cross-border sales with Amazon under the EU’s regulations on the free movement of goods.
2. Prioritise ASIN over account-level funding
Vendor Managers often ask for cost or margin support based on the Net PPM performance of your vendor account. However, in most cases this isn’t in the best interest of your brand.
That’s because any funding should support the products directly affected by CRAP or temporary sales disruptions due to low profitability. If you write a blank cheque to fund your account margins, you run the risk of overfunding Amazon.
Instead, you can grant Amazon any type of CSA, GMM or GMA only for specific ASINs.
3. Time limit any funding
In addition to giving preference to agreements at ASIN level, it’s also important to ensure that the funding is limited in time. Ideally for a period of 2 weeks, but no longer than a maximum of 3-4 weeks.
This ensures that you can reassess the root cause that led to the cost support. Market dynamics, retail prices and stock levels can change quickly. This means that the original justification for the funding could disappear.
Without a regular review, you risk funding outdated issues that lead to unnecessary margin erosion for your brand.
4. Ask for value in exchange
Lastly, remember that providing any form of funding to Amazon directly supports your Vendor Manager’s targets in their category. As a result, you should always ask for value in return when offering margin support.
This could include free Vine credits, help with resolving shortage disputes or additional visibility placements that would normally come at a cost.
Don’t underestimate the leverage you have in these negotiations as a brand.
Conclusion
CSA, GMA, and GMM agreements have become a standard request from Vendor Managers. They help Amazon secure its margin targets. But they also expose 1P vendors to significant financial risks.
Before committing to any cost or margin funding, carefully weigh the potential gains against the financial risks. Although these investments can help mitigate sales disruptions, they may erode your vendor margins if the incremental sales fail to offset the funding costs.
Need help navigating cost support negotiations with Amazon?
If you need help evaluating and managing cost support discussions with your Vendor Manager, get in touch. I offer dedicated consulting services to help protect your profit margins with Amazon.